Office suites dominated sales. Investors identified high employment and business confidence would making investment risk low. As a positive economy ended the GFC, demand and rent grew due to limited CBD supply. Small business and executives returned to CBD offices after working from home, whilst other businesses expanded.
Like politics, commercial and residential property seems to divide investors into two disparate parties. Each option has unique pros & cons which appeal to different people's investment situation. However, the old adage "Don't put all your eggs in the one basket" is true. When commercial markets are slow, often the residential real estate market is booming and vice-versa, so diversifying your portfolio to include commercial is a good long-term investment idea.
PROS & CONS of COMMERCIAL:
Long Lease: Commercial property presents the stability of a long term lease, often secured by a bank guarantee. A "set-and forget" lease of 3-20 years with 5 year options to re-let at end of term gives you peace of mind, whereas residential leases are only locked in for 3 to 12 months.
Risk: Balancing the benefit of a long lease is the fact that commercial properties generally have longer vacancy periods: months as opposed to weeks in residential. Also, the commercial market is less predictable and in poor economic conditions, demand drops and leasing empty property becomes difficult. However, existing commercial tenants are generally low-risk, being less likely to default on rent.
Return: Higher risks associated with commercial investment gives reward of higher return: 7%-10% net compared to residential's 5% average. This is achieved by high rent, depreciation deductions and less expenses as tenants pay outgoings such as council rates, insurance and maintenance.
Protecting your property: Commercial tenants have a vested interest in caring for the look and condition of your property as it reflects their image to clients and often employ professional cleaners to regularly maintain the property.
Rent Reviews: Rent review is essentially guaranteed, written into the lease at around 4% or CPI. Commercial leases are very detailed contracts, prepared by solicitors.
Market Entry: Lenders may offer you a 95% or 100% loan on residential, but commercial property generally requires 30% deposit and higher interest rates. Furthermore, loan approval may be difficult on untenanted commercial investments. It is generally easier to buy residential property, and cheaper. Commercial prices are often assumed to be high, due to CBD locality and large size of many retail and industrial spaces. However, small strata offices are a fantastic first investment and you may be surpries how affordable they are. Try these Smart Buys
KEEN TO KNOW MORE? Click these links:
- Beginner guide to commercial property investment By Property Professor Peter Koulizos
- "Demand for offices on the Rise" Kirsten Craze, see pg 259
- Commercial vs Residential Pros & Cons By Mortgage Choice
- www.sydneylinks.com.au For residential & commercial investment property
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